In its latest Economic Survey for Ireland, the OECD warned that downside risks to growth have become “more prominent” and as a result “fiscal restraint is called for in the near term” as higher spending could once again lead to higher prices given the current capacity constraints.

It is also recommended increasing spending efficiency and improving the “medium-term resilience of tax revenues”.

Among the risks to the Irish economy cited in the report are geopolitical fragmentation, weaker global demand potentially weighing on exports, tighter capacity constraints, or renewed pressures on energy and food prices which may keep inflation higher.

“Maintaining short-term fiscal prudence would also help build buffers to increase resilience to shocks and improve long-run fiscal sustainability,” the report said.

Recommendations

The OECD has recommended the Government broaden the tax base, in order to be less reliant on corporation tax, which could include personal income and value-added tax reforms. 

It added that money can also be saved by “addressing repeated, sizable spending overruns, especially in the health sector”. 

The fiscal restraint the OECD is seeking also extends to the cost-of-living measures introduced in various budgets over the last few years.

The report noted that around half of cost-of-living measures in the last budget were “untargeted” and such measures should be phased out in the future “in order to continue to build buffers”.

The OECD also made a number of recommendations that would increase Ireland’s attractiveness as a place to do business. 

It said that despite increases in childcare subsidies in recent years, access to childcare remains constrained for some groups due to high costs, adversely affecting female employment opportunities. It advised making public financial support for childcare more means-tested and having it coupled with continued measures to expand childcare capacity.

On climate issues, the OECD warned that the country is not on track to meet its 2030 greenhouse emissions targets and needs to make faster progress.

Greenhouse gas emissions in 2023 were only 7.8% lower than 2018, as against the national target of a 51% reduction by 2030.

In this area, the OECD made a number of recommendations but the key ones included calls for faster implementation of climate plans, a fast-tracking of permitting and grid connection processes for renewables, as well as an alignment of carbon prices across sectors in line with their environmental impacts, and phasing out fossil fuel and other environmentally harmful subsidies.

Despite these concerns, the OECD said Irish economic activity is set to be “robust” in 2025 and 2026 as “inflationary pressures and financial conditions ease and volatility from the multinational sector subsides”.

Finance Minister Paschal Donohoe welcomed the publication of the report,  saying it points to the “resilience of the Irish economy” while noting the various challenges the country faces.

“It is my intention to bring a Memorandum for the information of Government in the coming weeks further setting out the key insights and recommendations from this work and the points to note from it,” he said.